According to the recent PricewaterhouseCoopers MoneyTreeTM report and the National Venture Capital Association, over $7.0 billion of venture capital (“VC”) funding was deployed during 2Q12, on nearly 900 financings, representing a 17% increase over total invested capital in 1Q12. Of all sectors, the Software segment received the largest proportion of funding with over $2.3 billion – representing 30% of 2Q12 investment), the sector’s highest level since 1Q01.

Funding growth is largely indicative of a slowly improving economic environment, albeit one still fraught with uncertainty. While recent VC investment is generally consistent with activity in the previous 18 months, and much better than the 2009 / 2010 time frame (average of ~$5.4 billion / quarter), it is a material drop-off from the $8.0 billion invested across the same period one year ago. The two largest areas of decline year-over-year (“YoY”) are within the Seed (down ~$220 million / 53% YoY) and Later Stage (down ~$890 million / 30% YoY) categories. In recent history, growth within these two categories has largely been limited by heightened interest in the Early Stage category, which accounted for 46% of deals and 30% of overall investment in 2Q12. We believe this shift in investment priority is indicative of two key trends across the VC landscape:

A recommitment of the investor community towards the U.S. “innovation pipeline” and increased confidence in the long-term outlook of the U.S. economy. Demonstrative of this trend, first time financings grew to $1.1 billion from $0.9 billion, posting the single highest quarter-over-quarter (“QoQ”) percentage growth since 4Q09. As depicted in the chart below, the Early Stage category has consistently grown its share of quarterly aggregate VC investment over the past 4.5 years, largely at the expense of the Later Stage category.

Despite a renewed interest in the U.S. start-up community, investors appear to have reallocated VC dollars towards more mature, Early Stage companies at the expense of the Seed segment (e.g., representing companies without a clearly defined product and generally less than ~18 months of operational history). While Seed investing experienced growth between late-2008 and early-2010, the VC risk tolerance levels have reset considerably to favor more established businesses.